Business Context and Reporting Period
Company: First Advantage Corporation (FADV)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2009
Business Overview: A global risk mitigation and business solutions provider operating in five segments: Credit Services, Data Services, Employer Services, Multifamily Services, and Investigative and Litigation Support Services. The company is majority-owned by First American Corporation (approx. 80% equity interest, 98% voting power).
Key Financial Metrics
| Metric (in thousands) | Three Months Ended Sep 30, 2009 | Nine Months Ended Sep 30, 2009 |
|---|---|---|
| Total Revenue | $169,566 | $550,593 |
| Net Income (Attributable to FADV) | $11,450 | $35,035 |
| Operating Income | $18,444 | $59,205 |
| Operating Margin | 11.8% | 11.6% |
| Cash and Cash Equivalents | $57,784 | $57,784 (Balance Sheet) |
| Operating Cash Flow (9 months) | N/A | $57,019 |
| Total Debt (Current + Long-term) | $21,474 | $21,474 (Balance Sheet) |
| Available Credit Facility | $209,700 | $209,700 |
Material Changes vs. Prior Period
- Revenue Decline: Total service revenue decreased 10.7% ($18.7M) for the quarter and 6.4% ($34.6M) for the nine months compared to 2008. This was driven by economic downturns affecting hiring (Employer Services), credit markets (Credit Services), and litigation activity (Investigative Services).
- Profitability: Operating income decreased $3.3M for the quarter and $13.7M for the nine months year-over-year. However, the Credit Services segment saw operating income increase by $5.4M (quarter) and $9.4M (nine months) due to cost reductions.
- Segment Performance:
- Credit Services: Revenue down slightly, but operating margin improved significantly (11.6% to 21.0% QoQ) due to efficiency gains.
- Employer Services: Revenue down 23.1% (quarter) due to high unemployment; operating income fell $2.7M.
- Investigative Services: Revenue down 47.3% (quarter); operating income fell $5.0M due to diminished case activity.
- Data Services: Revenue increased 16.4% (quarter) driven by lead generation, though margins compressed due to revenue mix.
- Cost Management: Salaries and benefits decreased $9.2M (quarter) and $37.3M (nine months) due to strategic staff reductions and office consolidations.
Guidance, Outlook, and Risks
- Exchange Offer (Subsequent Event): On October 8, 2009, First American Corporation commenced an exchange offer to acquire all outstanding Class A shares at a ratio of 0.58 First American shares per FADV share. The Board recommended acceptance.
- Impact of Offer: If consummated, the fourth quarter will face negative impacts from transaction costs (estimated $3.0M fee to Morgan Stanley) and accelerated vesting of unamortized stock-based compensation (approx. $9.4M total).
- Outlook: Management expects continued weakness in real estate, mortgage, and transportation markets. Focus remains on expense reduction and operating efficiencies.
- Goodwill Impairment Risk: No impairments recorded in the first nine months of 2009. However, management warns that if forecasted revenue/margin assumptions are not met, additional impairment losses may be required in the fourth quarter.
- Liquidity: The company has $57.8M in cash and $209.7M available under its credit facility. Management believes this is sufficient for the next 12 months, though the exchange offer could trigger an "Event of Default" under the credit agreement terms.
Investor Verification Checklist
- Exchange Offer Status: Verify the final outcome of the First American exchange offer and the associated merger timeline.
- Q4 Expense Impact: Confirm the exact amount of accelerated stock-based compensation and transaction fees expensed in Q4 2009.
- Goodwill Testing: Monitor the Q4 2009 goodwill impairment test results given the economic uncertainty.
- Debt Covenants: Review the impact of the potential merger on the $225M Secured Credit Facility and whether an "Event of Default" is triggered or waived.
- Segment Recovery: Assess the trajectory of the Employer Services and Investigative Services segments as the economy recovers.